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Will TreeHouse Foods Prove to Be a Good Buy?

April 07, 2014 | About:
Rustic Nomad

Rustic Nomad

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TreeHouse Foods (THS) improved net sales in each of its segments resulted in outstanding Q4 results. TreeHouse shares gained more than 10% and soared after the results. Going forward, the company is keen on capturing market share in different segments and is ready to sue Green Mountain Coffee Roasters (GMCR) to eliminate its monopoly in single-serve cups. In addition, TreeHouse is focusing on implementing new marketing strategies to grow its business.

Earnings Performance

In the last quarter TreeHouse’s earnings grew 14% owing to superior marketing and supply chain strategies. The fourth quarter was excited by an outstanding growth in revenue in three segments -- grocery, food service, and industrial, and which became the key reason behind the growth in TreeHouse’s gross margin and channel profitability.

TreeHouse’s new product offering of private-labeled single-serve coffee and hot beverage category added $180 million in Q4. In addition, TreeHouse expanded its presence in dry blended products and salad dressings by acquiring Associated Brands and Cains Foods.

In a Battle

The private-label single serve coffee and hot beverages, part of TreeHouse new product offering has helped the company perform well. The company is still trying to maintain its monopoly in single-serve brewing by suing Green Mountain, the maker of Keurig cups even after the expiration of certain patents.

TreeHouse has accused Green Mountain of entering into agreements with suppliers that were designed to give it monopoly power in the market once the patents expired. Green Mountain is well prepared to launch a new version of its Keurig brewer this year that is said to have an "anticompetitive lock-out technology." which would prevent the new brewers from functioning with cups made by unlicensed competitors. So, TreeHouse is keen on preventing this deal by going to court owing to the lucrative growth opportunities.

TreeHouse is ready to take Green Mountain head on in this market with a strong expectation of its private-label single serve coffee and hot beverage brands to outperform in the next quarter as well, so an overall sales growth of 9% to 10% is expected for 2014. Moreover, the relaxation in exchange rates between the Canadian dollar and the U.S dollar in 2014 must enhance profit margins.

Road Ahead

TreeHouse expects agricultural input costs to decline in 2014, but costs associated with packaging and energy is anticipated to increase. So, TreeHouse is on a spree to cut costs and improve operating efficiency. TreeHouse’s enhanced focus on more efficient products, including flavors and packaging options is expected to maintain the operating margins at a steady level. TreeHouse gross margins would definitely improve by at least 100 basis points this year through these strong moves.

Also, TreeHouse’s growth is ought to be boosted by improving consumer trends. Its peer Campbell Soup (CPB) gained momentum in the second quarter. Apart from this, Campbell is investing into promotions aggressively and has added several new products to its growing portfolio. Recently it launched eight new soups in the menu, and is promoting its Bolthouse Farms brand as well. Moreover, Campbell is sharply focused on organic growth offering which is another reason to be positive about the company. TreeHouse’s focus on offering items such as salad dressings could also benefit it from the organic market.

Conclusion

TreeHouse Foods is improving its operations and increase market share. Its single-serve product offerings are performing well. Moreover, its recent acquisitions should also add to its inorganic growth momentum. TreeHouse can be seen as a good investment stock with positive earning expectations likely to grow at double digit rates in the next five years.


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